Howard Marks, W’67, Oaktree Capital – Dare to be Great
18 January, 2016
category: Finance, Joseph Wharton Dinner
Howard Marks, W’67, helped pioneer credit investing in 1978 and continued to develop his career in credit-oriented investments, which brought him ultimately to found his firm Oaktree Capital Management in 1995. Today, Oaktree has $100 billion under management. It is the largest distressed-debt investor in the world and participates in credit markets on the world’s stage.
As Chairman, Mr. Marks is responsible for ensuring the firm’s adherence to its core investment philosophy. He communicates closely with clients concerning products and strategies, and contributes his experience to big-picture decisions relating to investments and corporate direction.
For someone so well-acquainted with numbers, Mr. Marks is also respected for his words. In one of his many memos to investors, Dare to Be Great II, he writes, “The more I think about it… who wouldn’t dare to be great? No one. Everyone would love to have outstanding performance. The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both.”
Can you explain in Wharton layman’s terms what Oaktree does?
Oaktree is a global, credit-oriented, alternative investment manager. “Global” means we’re active outside this country, mostly in Europe, as well as inside, but also in emerging markets and Japan. “Credit-oriented” means our origin and greatest emphasis is investing in debt. We invest in leveraged loans, high-yield bonds, mezzanine finance and distressed debt. Then my colleagues and I organized the first high-yield bond fund at Citibank in 1978, and became excited at the potential. Then my colleagues and I organized the first distressed-debt fund in 1988. Oaktree’s focus on alternative investing means we do not invest in traditional stocks and bonds. Fifty years ago, most investors invested in mainstream U.S. stocks and high-quality corporate and government bonds. But we don’t invest in those two areas. In addition to the debt instruments I described, our investments include private equity, real estate, convertible bonds and a few listed equities.
How did you approach the market or think differently to start that pioneer high-yield bond fund?
It wasn’t my idea. A client came into Citibank and said they wanted a high-yield bond fund. My boss turned to me and said, “Will you do this?” My contribution was that I was smart enough to say yes. When I met with Michael Milken, WG’70, I saw the merits of high-yield bonds, and committed to invest in them. Until roughly 50 years ago, the world believed that good investments were high-quality investments: the stocks and bonds of high-quality companies. Then, from 1968 to 1973, the stocks of America’s best companies lost the majority of their value. Later I was asked to look at high-yield bonds and riskier companies. That brought a revelation — that any asset can be overpriced or underpriced regardless of its quality. My career, and Oaktree’s, have been based on the prudent bearing of risk, for profit, not the avoidance of risk.
You’ve written extensively on risk, volatility and luck for 25 years. How did that inform your approach to investing?
When you write about something, you have to tighten up your thinking. It has to be rigorous, logical and reasonable before you put it on paper. Putting it on paper tests your ideas and the logic behind them.
In your last memo, you quoted from a conversation that you had with Charlie Munger, where he said about investing, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” Then you went on to describe second-level thinking. Can you describe that way of thought?
What it says is that if you think the same as everybody else, you’re going to perform the same as everybody else. Remember: Your goal in investing isn’t to earn average returns; you want to do better than average. Thus, you have to escape the crowd — your thinking has to be different from others. Not different and worse than that of others — it has to be different and better. But that’s not easy, because the crowd collectively has intelligence, and you have to have more intelligence.
You’ve written, as an example of luck, about your opportunity to attend Wharton. What was the key benefit or lesson of your attending Wharton?
Remember, I showed up at Wharton more than 50 years ago. What should a university teach? How to think, not what to think. If you’re working in an area that has theoretical underpinnings, it should teach you a theoretical framework into which the practical day-to-day considerations can be set. That’s the role of a business school, which is invaluable. The day-to-day stuff you can learn on the job. The other important aspects of business school are learning to work in teams and lead teams, and being exposed to bigger-picture considerations.
Can you talk about growing up in Queens? What did you learn from your father?
I learned to work. I always had jobs. We had a middle-class existence. I didn’t think school was that important. I was just a kid who played around.
What do you look for when hiring at Oaktree?
We look for intelligence, sheer horsepower, team spirit, ego control, and emotional maturity, rather than unfettered greed and self interest.
What advice can you give to students considering a career in investing?
Choose a career you think you will love, not just because you want to make a lot of money. Going forward, I think that it will not be as lucrative, especially if you are’t exceptional. If you are attracted to it and you are exceptional, then you can still do extremely well.
Can you share your thinking on leadership?
You can’t have an exceptional organization without exceptional leadership. You can’t take a bunch of smart people and lock them in a building and expect to get an exceptional outcome. Two plus two won’t equal four, unless there is some catalytic ingredient, and leadership can be that ingredient. The leader sets the tone for the organization in terms of work ethic, culture, integrity and style. My partners and I have devoted a lot of attention to getting those things right at Oaktree, and we are very happy with the result.
Have you noted common characteristics among the leaders you have raised up over time?
We try to operate on the high road, in terms of integrity and client service. It energizes this company. It creates a sense of mission, of satisfaction, and it’s helped us develop a positive reputation. Clients want to invest at Oaktree. We have a great clientele who want intelligent investment management, with the risk under control. We always put the client first. And it’s the organization that I want to work in. The great thing about being a leader is that you get to create what you want. I don’t want to work in a place that cuts corners, or has a reputation as the “sharpest” organization, as in “those guys are killers.” No, we want people to say these are good and smart guys who are trustworthy.
One way Oaktree has grown has been through partnering with companies like Vanguard. Can you advise other companies looking to partner?
Look for organizations that reflect the character you want to partner with, not just the most lucrative deal. When my partners and I started Oaktree, I had had experience with some entities in the mutual fund industry that I felt did not put the client first. So I said that we were not going to go into mutual funds. Then Vanguard approached us. Vanguard has the highest possible reputation for integrity and putting clients first, so we said, “We’ll partner with Vanguard.” The result has been terrific. We look for this in our partners.
What is different in today’s economic environment?
The world is growing slower than it used to. In the 1980s, the world was thriving. Today, it’s not. It’s easier to make money when things are thriving. When you buy something, it’s more likely to become worth more, and when you lend money, you’re more likely to get paid back. Risk taking is more likely to be rewarded. Since the crisis, , the U.S. economy has been limping along . . . even though we are the envy of the world.
You write in your memo Risk Revisited on the idea that risk means more things can happen than will happen.
Investing consists of just one thing: positioning your capital for the future — buying things that will produce a return. So how do you think about the future? Some think the future is set and knowable. Others think the future is not determined and unknowable. How you think about this subject will influence how you invest.
I don’t think the future is set and knowable. You can predict what will happen a year from now, but a lot can change in that year. Even if nothing changes — even if the ship slides down the rail exactly as it’s supposed to — we still don’t know what things will look like a year from now. So you have to consider a range of possibilities.
That’s why I think Elroy Dimson’s quote is so beautiful., “Risk means more things can happen than will happen”. The U.S. will have only one rate of growth in 2016, but many different rates of growth are possible. Even if you know which one is most likely, and you’re right about that, other things can still happen instead. So I think you need to look at life probabilistically. It’s from the fact that many different outcomes are possible, that risk arises. If you knew what was going to happen, there wouldn’t be any risk. ♦
In his acceptance speech, Mr. Marks spoke about three memories of being lucky (also read his memo “Getting Lucky” at Oaktree Capital) during his days at Wharton:
“I decided to follow my dad’s profession as an accountant, and am embarrassed to say that I took a class in advanced accounting in high school and loved it! My high school guidance counselor said that I would not get into Wharton, but luckily, my accounting teacher wrote a good recommendation, and I did get in. So I entered Wharton in 1963 to pursue accounting. Then I took a class with Charles Whittlesey, a great professor, who taught Money and Banking, and I must say that my eyes were opened. Then next semester, I took corporate finance from Professor Jim Walter, and I switched from accounting to finance.
“Fortunately, there were two requirements that don’t exist today. To take a class on literature from a foreign country, and to have a non-business concentration. I studied Japanese literature and made Japanese studies my minor. I learned Japanese philosophy, which impacted my investing approach. And I learned how to write, because 12 of my 15 credits were with Professor Dale Saunders, who was a demanding writer. This experience turned me around and made me a serious student.”